Benefits of Living Overseas
My net worth starting in 2020 is ~$1,000,038.
My net worth when I retired in 2015 was ~$600,000.
My net worth increased 166%. Not bad, right? What if I told you that I didn't earn a dime of that money? How did I do it? More importantly, how can you increase your net worth by 166%? The answer is geoarbitrage.
The Meaning of Geographic Arbitrage
Geographic Arbitrage (geoarbitrage, geo arbitrage, or geo-arbitrage are interchangeable) means moving to a place where the cost of living is lower than your current home. If you know me or have been reading my blog, you know that I consider international geoarbitrage the strongest benefit of the Nomadic FIRE lifestyle. By living abroad, my monthly expenses are 50% or less than living in the US. With globalization, technology, and remote work on the rise, it's now easier than ever to live and work in another country.
The idea behind geoarbitrage is simple: have a steady income in a strong currency (US dollar, British Pound, or Euro), then spend money in a cheaper country (Spain, Vietnam, Mexico, etc.). Regardless of whether your money comes from rental income, retirement income, or remote work, the key is keeping the higher income but living in a country, where your dollar goes further.
The concept of living in low cost countries isn't new but gained momentum this past decade, after best-selling author Tim Ferriss coined the term in his book, "The 4 Hour Work Week: Escape the 9-5, Live Anywhere, and Join the New Rich."
Low cost of living (LCOL) countries offers you so much more value for your money. Instead of dealing with ridiculously high rent and food costs in cities like New York or San Francisco, you could spend a fraction of that for a beautiful villa on an SE Asian beach in Bali or a European capital like Sofia.
In 2019, my monthly spending in Austria, Colombia, Cyprus, and Bulgaria was 70% less than if I lived in the US. The low cost of living didn't equal a low standard of living either. My living expenses involve an active social life, a centrally located apartment, frequent meals out, and weekly maid service.
What is Arbitrage?
Geographic Arbitrage. The term sounds technical, but it's straightforward. Let's start with what is arbitrage?
People use arbitrage all the time in real life. Have you ever drove past your usual grocery store and went to a cheaper supermarket because you found the same steaks cost less? That's arbitrage.
What Is Geoarbitrage?
Arbitrage is taking advantage of different prices in different markets. Geoarbitrage uses geography as a way to get more value for the same dollar. Steaks cost less in a cheaper supermarket, right? Well, an apartment in the suburbs costs less in an apartment in a trendy neighborhood in the city.
Domestic cost savings moving in the United States can be substantial. The map above shows how moving from California to any states in the South can save you 30% to 45% in living expenses.
I talk a lot living overseas. But taking advantage of arbitrage opportunities doesn't require jumping on an airplane or even moving states. You can save money changing neighborhoods in the same city.
As a real-world example, I lived in the suburbs about 15 miles outside the Portland's city center. I spent less on rent, reduced my commute time (lowering my transportation costs), and paid ~1.5% less income tax, by living 15 miles outside the city.
This is where things get spicy. While more complicated than moving to another state, moving to another country has tremendous financial potential.
I may have saved $2000 to $3000 per year domestically moving from an urban area to the suburbs. But I save $20,000 to $30,000 per year moving from the United States to another country.
Whether we are looking across the country or across the world, being frugal isn't a new concept. We look at ways to increase our savings and discretionay income all the time. Geoarbitrage supercharges the idea. If moving from the city to the suburbs can reduce taxes, you can figure out that moving from New York to Alabama can slash your housing costs. Now, look at the extra savings of moving from Portland to Medellin ($3,057 vs. $740 = $2,317 saved per month). Now we are talking about reinventing your financial future entirely.
INSIDER TIP : Consider the average social security income in the US is $1,500 per month. Living in the US on social security alone is a poverty-level life, but $1,500 covers the cost of modest lifestyle for a family of two in Medellin.
Can Geographic Arbitrage Reduce My Cost of Living?
Geoarbitrage takes advantage of the fact your dollars can go farther in a place with lower costs. Let's look at average expenses to live in a Medium Cost of Living (MCOL) city like Portland, Oregon.
Economic Policy Institute Monthly Estimated Expenses
One Adult and No Children - Portland/Hillsboro Oregon Metro Area.
Source: Economic Policy Institute- Cost of Living Calculator measures the income needed for a modest yet adequate standard of living.
Using Geoarbitrage To Reduce Housing Expenses
Housing is the largest expense for most Americans. 1/3 of the average budget is to put a roof over our heads. With multiple variables like state income tax vs. property tax or small town vs. big city affecting how much we pay for real estate, housing is an excellent candidate for geoarbitrage opportunities. Let's look here first.
That is $962 per month for a studio apartment. Let's round that up to $1,000 per month for housing costs to make the calculations easier.
Here is an semi-furnished new apartment in a centrally located part of Portland for $975 + $100 for utilities.
According to most Cost of Living Indexes, Portland is a MCOL city. What type of studio do you think $1,000 gets you in an expensive city like New York or San Francisco? I'll stop you from Googling because it's doesn't exist. What about the cheapest location? The cheapest rent in the US goes to College Station, Texas, where $600 gets you an average unfurnished studio.
Cheapest Cities For Rent (per square foot)
Studio Apartment Rent
The cost difference between $1000 vs. $600 in rent is a DOMESTIC geoarbitrage opportunity. Staying in the US, but moving from Oregon to Texas and your largest expense goes from $1,000 to $600.
The extreme version of saving on housing expenses leverages INTERNATIONAL Geoarbitrage. Let's look at some real-world examples:
Here is a huge $700 one bedroom with large balcony, solid oak kitchen, and leather furniture in Medellin.
Or my $450 villa, a 15-minute walk from the beach in Bali.
Or my $500 one-bedroom city center Airbnb, also only a 15-minute walk to the beach in Turkey
These are personal examples. Just so you don't think I'm lucky are finding apartment deals, here is data on the average prices for 1- bedroom apartments in cities I have lived in last year. You have the potential to spend $6000 or more a year on just rent..
I'm using housing costs as an example of geoarbitrage opportunities, but location drives higher costs for food, transportation, health care, state income taxes, etc. Living in a cheaper country will reduce costs, increase discretionary
Living overseas last year, I reduced my monthly budget, increased my discretionary income, and saved over $21,000 ($1,754 per month) on just transportation, taxes, and health insurance.
Marco Living Abroad
Monthly Cost Savings = $1,754
If your location is flexible, moving around the country, or even better, moving around the world can significantly shift your financial outlook. Cheaper countries can increase discretionary income by 50%, putting more money back in your pocket, or even better, freeing up more money for you to invest.
INSIDER TIP : Taxes are very location-dependent and can be tricky to compare. For instance, are states with no sales tax (Alaska, Delaware, Montana, New Hampshire, and Oregon as of 2019) cheaper than states with no income tax (Alaska, Florida, Nevada, New Hampshire, South Dakota, Tennessee, Texas, Washington and Wyoming as of 2020)? Look at all variables to compare properly.
How to Use Geographic Arbitrage For Financial Independence?
The Triple Benefit of Geographic Arbitrage- The Math Behind the Magic
Substantially Increasing Your Savings
As we've seen above, geoarbitrage is a game-changer when it comes to increasing your savings rate. You can clip coupons all day, give up your lattes, bike to work, and cut out all your happy hours with friends and you will unlikely come up with a way to cut your living expenses by as much as moving abroad.
Let's look at some real numbers. Say hello to John and Beth. They are an average two-person family earning an average salary, living in an average cost city in the US. Combined, they take home $56,000 per year after taxes.
Neither John nor Beth are big spenders. They live an average lifestyle in a one bedroom apartment in the city center. They cook most their meals at home, take public transportation, and go to an occasional nice restaurant.
Since John and Beth are not big spenders, they saved more of their income than the average American. Currently, they spend $46,000 a year and save $10,000 per year. Saving 18% of their net income vs. the average US personal savings rate of 7.5%. Not bad John and Beth.
John and Beth, both 35 years old, decide they have a goal to save $1,000,000 for retirement. They like the sound of being millionaires. Assuming John and Beth keep their money in cash (no investments) at the end of 25 years of work, they would have $250,000 in retirement savings. They would be 25% of the way to their goal.
John and Beth decide they want to accelerate their retirement savings with a geoarbitrage strategy.
Let's go back to our Geoarbitrage Calculators from The Earth Awaits. We adjust the numbers for a two person household, because John and Beth will be moving abroad together.
John and Beth both have university degrees and find location independent jobs that pay the same salary. If they maintain their salary, keep the same average lifestyle, and save the rest, their geoarbitrage plan can increase their investment portfolio from $250,000 to between $750,000 and $1,100,000 over 25 years.
Supercharge Your Investment Strategy
Cutting your expenses is just the first step. To amplify the benefit, invest the savings. Living overseas in LCOL countries gives you more money to invest. When you save and invest money, your money makes more money; then the money that your money made, makes even more money. This insane growth is compound interest.
"Compound interest is the 8th wonder of the world. He who understands it, earns it; he who doesn't, pays it."
More money invested supercharges compound interest. Compound interest increases your net worth, and allows you to hit our financial goals faster. Let's look at the numbers in action.
Now things are getting spicy. See how much bigger the red bars are outside the United States? Geoarbitrage paired with compound interest drives the difference in the numbers.
Substantially Reduces Your Final Financial Target
Geographic arbitrage has the additional benefit of reducing the amount of money you need to hit your financial goals.
Let's revisit John and Beth. Using the 4% rule, let's estimate how they need to retire in the following countries:
SAVE & INVEST
APPROXIMATE $ RETIREMENT
# OF YEARS TO REACH RETIREMENT
If John and Beth stayed in the US, saved and invested their money, they could reach their retirement target of $1,200,000 in 32 years. If they started saving at 35 years old, they couldn't retire until 67.
However, if they moved to Portugal as part of a geoarbitrage strategy, Portugal's lower cost of living would cut their financial target in half to $630,000. John and Beth could then retire in 13 years (vs 32 years in the US). Now they can retire early at 48 years old.
Want an even bigger shocker? With the major savings of living in Colombia, John and Beth would only need $300,000 to retire. $300,000 would only take them 6 years of saving and investing. In Colombia, enjoying early retirement at 41 years old becomes possible.
See the effect of the geoarbitrage's Triple Benefit in the graph. Outside the US, you need less money and less time making early retirement a reasonable possibility.
G A M E – C H A N G E R. You can hit financial targets 20 to 25 years earlier, by living outside the United States. Geographic arbitrage dramatically shifts the math on financial independence and rewrites your financial future.
How to Supercharge Geographic Arbitrage With Other Financial Tools?
The Triple Benefit makes Geoarbitrage is the most powerful, yet underrated financial strategy to reach FIRE. The math above shows how you can leverage geoarbitrage and accelerate your financial goals by jumping on a plane.
Here is another free tip. You can compound the effects of geoarbitrage with other financial tools and strategies to hit your FIRE targets faster.
INSIDER TIP : Want to see if housing hacking is for you? Do a roommate test run. You can rent out a room temporarily on Airbnb. Without making a long-term commitment, you can test if having a roommate is worth the cost savings. You might even make more money charging more for short-term rentals.
INSIDER TIP : If you are living outside the United States for more than 330 days, you can use the Foreign Earned Income Exclusion (FEIE) to exclude $107,600 (2020 amount) of earned income from US income taxes.
Each of the strategies above deserve their own article. But this should give you an idea of how to ramp up the Triple Benefit of geoarbitrage to smash your financial targets.
What are the Indirect Benefits of Geographic Arbitrage?
The math behind geographic arbitrage shows clear advantages of adding location flexibility to your financial toolkit. The direct benefits of leaving a high cost location for a cheaper place are clear:
- Magnifies your savings rate
- Supercharges your investment strategy
- Reduces the amount of money and time you need to hit financial independence
Geoarbitrage is the fastest way outside of the gambling to reduce the time you need to hit financial freedom. Hitting your financial goals years earlier means more time for family, hobbies, and all the things in your life more important than work.
The indirect advantages of living abroad are pretty compelling, as well. Living abroad allows me luxuries (eating out, massages, maid service) I could not afford in the US. Geoarbitrage provides the savings of a low cost life without requiring a low cost lifestyle. I dedicate an entire article to the indirect benefits of living abroad.
One of the first steps any financial planners recommend is living below your means. There are entire FIRE websites dedicated to Financial Freedom through minimalism, walking to work, packing your lunch, and avoiding luxuries to increase your savings rate.
Yet, few strategies can cut your expenses by 50% as efficiently as living abroad. You don't need to sacrifice living life now for a financial future tomorrow. Geoarbitrage offers you the alternative of world travel, luxury apartments, dinners out, and maid service for less than the cost of a middle-class budget in the US.
"Bottom Line: Jumping on a plane can level up your life, lifestyle, and finances at the same time."
Wrapping Up: Geographic Arbitrage
Geographic arbitrage is a fancy term for a simple premise: save money by relocating from a high-cost area to a low-cost area. You can move neighborhoods, change cities, or live in a different part of the world for maximum benefit.
The Triple Benefit of international geoarbitrage significantly reduces your cost of living, increases your savings rate, decreases the requirements of your financial goals, and fast-tracks your path to financial freedom. To me, living in a cheaper country is the single best tool to reach financial independence. The differences in moving overseas are life-changing in both the literal and economic sense of the word.
Changing locations is not without compromise. Moving from the suburbs to a less expensive neighborhood meant being further away from social activities. Moving from San Francisco to Portland meant trading California sun for Pacific Northwest rain. Moving from Portland to Medellin meant I see my friends less. The key is prioritizing what matters to you vs. what are things that don't add to your current or future happiness.
For me, the benefits of living abroad outweigh the disadvantages. But living in another country is not always rainbows and unicorns. In some countries, crime and safety are different than in the US. The cheaper a country is, the higher the poverty and income disparity. Mindless bureaucracy and government corruption feels magnified in LCOL countries vs. the US. There are scams, struggles, and frustrations that are unique to living overseas. I'll be pointing out the genuine drawbacks of living abroad in a future article.
I can say after living in over ten different countries that the drawbacks are overblown. An estimated nine million Americans live outside the United States. We wouldn't be here if the pros vs. cons didn't favor living abroad.
My advice? Do a test run in a new country for a few months. Don't stay in a resort or hotel. Rent an Airbnb or apartment in a local neighborhood you would consider living in. Shop the local markets, get out, and meet fellow expats and locals. If that city or country doesn't feel like home, check out the next place on your list. There are 195 countries in the world waiting for you to call it home.